Oil&Gas — Chapter 11 Bankruptcy Cases — PETITION (2024)

Patriot Well Solutions LLC

July 20, 2020

And YET ANOTHER oilfield services company in bankruptcy. Colorado-based Patriot Well Solutions LLC provides coiled tubing, nitrogen & pumping services, wireline logging and perforating services and crane services to the oil and gas industry in North Dakota, Wyoming, Colorado and Texas; it filed its chapter 11 petition in the Southern District of Texas to pursue a sale of substantially all of its assets. Backed by White Deer Energy LP II and MBH Energy Resources LLC, the company was formed in early 2016. White Deer has committed to providing a $9.4mm DIP and will serve as the company’s stalking horse purchaser.

• Jurisdiction: S.D. of Texas (Judge )

• Capital Structure:

• Professionals:

  • Legal: Squire Patton Boggs LLP (Christopher Giaimo, Travis McRoberts, Kelly Singer, Jeffrey Rothleder)

  • Managers: Ben Guill, James Meneely III, Eric White, Michael Tangedahl, Robert McNally

  • Financial Advisor/CRO: Sonoran Capital Advisors (Matt Foster, Dax Murray, Ry Neri)

  • Investment Banker: Piper Sandler & Co./Simmons Energy

  • Claims Agent: Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

  • Pre-petition Lender, DIP Secured Lender & Stalking Horse Purchaser: White Deer Energy LP II

7/21/20 Docket #2

Permian Holdco 1 Inc.

July 19, 2020

Permian Holdco 1 Inc. and three affiliates (the “debtors”) filed chapter 11 bankruptcy cases in the District of Delaware. We know. It’s shocking. How in hell could a manufacturer of above-ground wellsite fluid containment and processing systems for oil and gas E&P companies be in trouble?!? The debtors’ pre-pretition lender will serve as DIP lender ($5mm) and stalking horse purchaser, credit bidding the DIP and prepetition credit facility amount ($28.6mm) as appropriate/necessary. Riveting stuff.

• Jurisdiction: D. of DE (Judge Walrath)

• Capital Structure: $28.6mm RCF & TL (New Mountain), $19.435mm unsecured promissory notes

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Robert Poppiti Jr., Joseph Mulvihill, Jordan Sazant)

  • Financial Advisor/CRO: CM Advisory LLC (Chris Maier)

  • Investment Banker: Seaport Gordian Energy LLC

  • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

• Other Parties in Interest:

Templar Energy LLC

May 31, 2020

Templar Energy LLC (and six affiliates, the “debtors”), an Oklahoma City-based independent oil and gas exploration and production company that operates primarily in the Greater Anadarko Basin of Western Oklahoma and the Texas Panhandle, filed a prepackaged plan of liquidation early Monday morning — the culmination of a multi-year effort to stave off the inevitable.

A quick flashback. Four years ago oil and gas companies were collapsing into bankruptcy left and right. After oil and gas prices fell hard, the oil and gas tide rolled out and left a lot of investors stranded naked on the beach. Most funds were of the view that this was just a hiccup. One fund after another raised billions after billions of dollars thinking that energy was “where it’s at.” We now know how off-kilter that thesis was.

Some companies back then were luckier than others. Thanks in large part to its relatively simple and highly concentrated capital structure and a clear demarcation of value based on prevailing commodity prices of the time, in September 2016, Templar Energy was able to consummate an out-of-court restructuring that extinguished $1.45b of second lien debt. Repeat: $1.45 BILLION of second lien debt — a tremendous amount of value destruction a mere four years after the company’s formation. Of course, as with all things there are nuances here. “Value destruction” is a relative phrase that applies to the par holders of the debt when originally issued. Certain second lien lenders who participated in the out-of-court restructuring may very well have purchased the paper for cents on the dollar once the par guys had to pull the ripcord. Destruction there, therefore, is a function of price. There’s no way to know (from publicly available information) whether any of the original holders of second lien paper came out ahead upon receiving $133mm in cash and 45% of the equity in exchange for their second lien paper. It’s certainly possible that some did.

It’s also highly probable that some didn’t. Take Ares Management LLC, Bain Capital and Paulson & Co. Inc. for instance; they each participated in a rights offering for participating preferred equity in the company in exchange for $220mm dumped into this turd (plus $145mm placed by legacy equity holders). Given that the RBL IS NOW IMPAIRED here, clearly that equity check hasn’t borne fruit. It was also used to pay the aforementioned $133mm of cash recovery so … suffice it to say … this does not seem like one that the aforementioned funds will be referencing in future LP-oriented marketing materials.

Emanating out of that ‘16 transaction is the debtors’ current $600mm RBL. This time around, it is the fulcrum security. The debtors note, “Critically the claims under the RBL Facility are deeply impaired.” And the RBL lenders have no intention of owning the assets — predominantly leases with various oil and gas mineral owners covering non-exclusive working interests in approximately 2,165 oil and gas wells over approximately 273,400 continuous acres of property. Let’s be clear here: first lien lenders generally aren’t in the business of horizontal drilling and hydraulic fracking. Of course, right now, the debtors aren’t really in the business of horizontal drilling and hydraulic fracking. At least technically speaking. Given where oil and gas prices are — thanks Putin/MBS on the supply side, COVID-19 on the demand side — the debtors aren’t even conducting any drilling. Typically they operate anywhere up to 13 rigs at a time. All of which is to say that the lenders’ position explains why this is a sale + plan of liquidation case rather than a second debt-for-equity play.*

To aid the debtors’ attempts to continue pre-petition sale efforts post-petition, certain of the RBL Lenders have committed to a $37.5mm DIP (with a 0.5-to-1 $12.5mm rollup). Pursuant to a restructuring support agreement, the RBL lenders have agreed to receive their pro rata share of any net sale proceeds and all remaining cash held by the debtors’ estates as of the plan effective date minus (i) cash needed to repay the DIP, (ii) wind down funds, and (iii) monies placed into a professional fee escrow. Royalty owners, materialman and mechanics’ lienholders will be paid in full. General unsecured claimants and equity will get wiped.

*We should note — to hammer home the point — that one of the events that hammered the debtors’ liquidity position was the RBL lenders’ April 1, 2019 redetermination down of the RBL borrowing base to $415mm. This regularly scheduled redetermination analysis created an immediate $22mm “deficiency payment” liability for the debtors as it had $437mm borrowed at the time. The debtors stopped making those payments in November 2019. They’ve been in a state of forbearance with the RBL lenders ever since.

$37.5mm DIP with $12.5 rollup

• Jurisdiction: D. of Delaware (Judge )

• Capital Structure:

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Robert Britton, Sarah Harnett, Teresa Li) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Jaime Luton Chapman, Tara Pakrouh)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Guggenheim Securities LLC (Morgan Suckow)

  • Claims Agent: KCC (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP Agent ($37.5mm): Bank of America NA

  • Consenting RBL Lenders

    • Legal: Morgan Lewis & Bockius LLP (Amy Kyle, Andrew Gallo) & Richards Layton & Finger PA

    • Financial Advisor: RPA Advisors LLC

  • Large Class A equityholders: Ares Management LLC, Paulson & Co. Inc., Bain Capital, Lord Abbett, Archview Investment, Bank of America, Seix Advisors, Bardin Hill/Halcyon Loan Invest Management, Oppenheimer Funds

Unit Corporation

May 22, 2020

Oklahoma is where a lot of the action is at. Unit Corporation ($UNT) is a publicly-traded Tulsa-based holding company that, through three operating segments, offers (i) oil and gas exploration and production, (ii) contract drilling and (iii) midstream services. Like every other oil and gas company under the sun, this one has too much funded debt. $789mm to be exact, split between a $139mm RBL facility and $650mm in ‘21 subordinated unsecured notes. And like every other oil and gas company under the sun, it cannot sustain its capital structure. For months now, the debtors have been the bankruptcy equivalent of deadbeats — bouncing from one standstill agreement to the next so as not to get hit with a meaningful on-schedule redetermination liability that they wouldn’t be able to satisfy (PETITION Note: this is particularly relevant because they had already been hit by a “wildcard” or “off-schedule” redetermination in January, knocking their borrowing base down $75mm. Instant liability! Yay!!). On brand, the debtors likewise couldn’t afford their semi-annual May 15 interest payment.

Why the bankruptcy now? Well, you’ve seen this movie many times already in the last month or so. You’ve got a starring role for Vladimir Putin. And a starring role for MBS. And you’ve got a few plagues for added drama: first, plummeting commodity prices and then a global pandemic. These factors negatively impacted liquidity and sparked a number of strategic processes including (a) the sale of 50% ownership in Superior Pipeline Company to SP Investor Holdings LLC for $300mm in spring of 2018 and (b) an attempted up-tier exchange of the subordinated notes into newly issued 10% senior secured notes and 7% junior notes. The debtors, however, were unable to successfully obtain the requisite number of tenders. Not only would the exchange have extended the debtors’ maturity profile and eliminated short-and-medium term refi risk, it would have removed the danger that the debtors would trigger a springing maturity in their RBL. Oh well.

Luckily the debtors got themselves an agreement with 70% of the subordinated noteholders and the RBL lenders on the terms of a consensual financial restructuring transaction — like, as the shotclock was about to go off (read: when the standstill agreement expired on May 22, the filing date). The deal includes, among other things, (i) a $36mm new money DIP credit facility, (ii) a debt-for-equity swap by the noteholders for equity in each of reorganized Unit Corp and the upstream and contact drilling opcos, (iii) a new $180mm exit facility from the RBL lenders in exchange for a 5% exit fee paid in post-reorg equity in reorganized Unit Corp. (PETITION Note: apparently the RBL lenders have no interest in owning equity in contact drilling services), and (iv) payment in full in cash or reorganized equity to general unsecured claimants depending upon which entity they have a claim against. Notably, equityholders who do not opt out of releases will receive out-of-the-money warrants exercisable for an aggregate of 12.5% of the interests in the reorganized Unit Corp entity.

We’d be remiss if we didn’t highlight one other aspect of these cases. As is all the rage these days, management got away with an amended incentive structure on the eve of bankruptcy that enriched them all to the tune of $900k. Sweeeeeet. Meanwhile, they spent a good chunk of November ‘19 through April ‘20 sh*tcanning their employees and promising them 4 weeks of severance for every year of service up to 104 weeks. While this is admittedly a pretty rich severance plan, it appears that the restructuring support agreement memorializing the above-referenced transaction proposes to renege on this policy and instead provide merely four to 13 weeks severance to employees. You’ve gotta love these oil and gas execs: they’re wildly proficient at destroying value but still manage to always siphon some off for themselves. It’s awesome.

• Jurisdiction: S.D. of Texas (Judge Jones)

• Capital Structure: $139mm RBL facility (BOKF NA), $650mm in ‘21 subordinated unsecured notes (Wilmington Trust NA)

• Professionals:

  • Legal: Vinson & Elkins LLP (Harry Perrin, Paul Heath, Matthew Pyeatt, David Meyer, Lauren Kanzer, Zachary Paiva, Emily Tomlinson)

  • Financial Advisor: Opportune LLP (Gary Pittman)

  • Investment Banker: Evercore Group LLC (Bo Yi)

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • RBL Agent: BOKF NA

    • Legal: Frederic Dorwart Lawyers PLLC (Samuel Ory) & Bracewell LLP (William A. Trey Wood III)

    • Financial Advisor: Huron Consulting Group Inc.

  • Ad Hoc Group

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Lauren Tauro)

    • Financial Advisor: Greenhill & Co. Inc.

Diamondback Industries Inc.

April 21, 2020

Texas-based Diamondback Industries Inc. and two affiliates (the “debtors”) filed for bankruptcy in the Northern District of Texas; they are manufacturers and sellers of disposable setting tools, power charges, and igniters used in the completion of oil and gas wells. Their wares are patent and trademark protected and appear to enjoy use by oil and gas companies engaged in drilling and well services. The debtors have managed to weather the oil and gas downturn over the last several years but the recent perfect storm brought on by the calamitous drop in oil prices + COVID-19 was too much to bear. These factors alone would have been troubling but the debtors also ran into some crippling legal troubles.

On April 3, 2020, the District Court for the Western District of Texas entered a patent judgment against the debtors that instantly dumped a $39.9mm obligation on the debtors in favor of Repeat Precision LLC. Originally, Repeat Precision LLC was the defendant in a patent license agreement dispute pursuant to which the debtors claimed breach of contract, misappropriation of trade secrets and fraudulent inducement. Repeat Precision filed counterclaims for patent infringement and tortious interference. It appears the debtors weren’t prepared for the counter-punches. The judgment was the knockout punch.

And that punch created a domino effect. The judgment triggered an event of default under the debtors’ prepetition credit agreement. This was a double-whammy: just two days before, the debtors failed to make a principal payment and breached various financial covenants under the agreement. The debtors’ lender, UMB Bank NA, did enter into a forbearance agreement with the debtors but the debtors nevertheless determined that chapter 11 cases may afford them a “breathing spell” to get their business together (and perhaps pursue a sale process). The debtors secured a $5mm DIP commitment to fund their cases.

• Jurisdiction: N.D. of Texas (Judge Morris)

• Capital Structure: $20mm funded RCF (UMB Bank NA)

• Professionals:

  • Legal: Haynes and Boone LLP (Ian Peck, David Staab, Matthew Ferris)

  • Financial Advisor/CRO: CR3 Partners LLC (Greg Baracato, Cade Kennedy)

  • Claims Agent: Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

  • US Bank NA

    • Legal: Bryan Cave Leighton Paisner LLP (Kyle Hirsch, Tricia Macaluso)

  • Unsecured Creditor: Repeat Precision LLC

    • Legal: Munsch Hardt Kopf & Harr PC (Davor Rukavina, Thomas Berghman)

Yuma Energy Inc.

April 15, 2020

Houston-based Yuma Energy Inc. and three affiliates, oil and gas producers focused on the Rocky Mountain, Mid-Continent, Gulf Coast and West Texas regions of the US, filed chapter 11 cases in the Northern District of Texas.

There ain’t much new here worth noting given that every oil and gas company is troubled and they all sing the same tune about commodity prices post-2015. But there was one striking admission in Yuma’s bankruptcy papers that is nearly as pervasive as commodity price effects. In the company’s own words, “…the decline in the financial health of the company stemmed not only from dropping commodity prices, but more importantly with a continuing high level of G&A for a company it’s [sic] size….” That’s right: bloated G&A. It’s as prevalent in Texas as oil itself.

This case is a liquidation.

• Jurisdiction: N.D. of Texas (Judge Mullin)

• Professionals:

  • Legal: FisherBroyles LLP (H. Joseph Acosta, Lisa Powell)

  • Financial Advisor: Ankura Consulting Group (Anthony Schnur)

  • Investment Banker: Seaport Gordian Energy LLC

  • Claims Agent: Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

Whiting Petroleum Corporation

April 1, 2020

Denver-based Whiting Petroleum Corporation ($WLL) and four affiliates (the “debtors”), independent oil-focused upstream exploration and production companies focused primarily on the North Dakota and Rocky Mountain regions, filed for bankruptcy in the Southern District of Texas. This is a story that requires an understanding of the debtors’ impressively-levered capital structure to understand what’s going on:

• $1.072b ‘23 RBL Facility (JPMorgan Chase Bank NA)(springing maturity to 12/20 if the ‘21 notes below are not paid in full by 12/20)

• $189.1mm ‘20 1.25% convertible senior unsecured notes due 2020 (Bank of New York Mellon Trust Company, N.A.)

• $773.6mm ‘21 5.75% senior unsecured notes

• $408.3mm ‘23 6.25% senior unsecured notes

• $1b ‘26 6.625% senior unsecured notes

You’ve heard us talk about the capital intensive nature of E&P companies so … yeah … the above $3.443b of debt shouldn’t come as much of a surprise to you. The company is also publicly-traded. The stock performance over the years has been far from stellar:

We should also add that the spike reflected in the above chart in the 2017 timeframe isn’t on account of some stellar improvement of operating performance; rather, it reflects a November 2017 1-to-4 reverse stock split which inflated the reflected price of the shares. Just to be clear.

Notwithstanding the hellacious performance since 2014, the debtors take pains to paint a positive picture that was thrown into disarray by “drastic and unprecedented global events, including a ‘price war’ between OPEC and Russia and the macroeconomic effects of the COVID-19 pandemic….” In fact, the debtors come in HOT in the introduction to the First Day Declaration:

The Debtors ended 2019 standing on solid ground. While the Debtors had more than $1 billion in unsecured bond debt set to mature prior to December 2020, the Debtors had significant financial flexibility to restructure their capital structure. Most importantly, the Debtors began 2020 with a committed revolving credit facility that provided them with committed financing of up to $1.75 billion—more than enough liquidity to service the Debtors’ 2020 maturities and fund anticipated capital expenditure needs throughout the year. For these reasons, the Debtors secured a “clean” audit report as recently as February 27, 2020.

And to be fair, the debt was doing just fine until the middle of February. Indeed, the unsecured notes didn’t hit distressed levels until right after Valentine’s Day. Check out this freefall:

Who needs open amusem*nt parks when you can just follow that price action?

Already focused on “liability management” (take a drink!) given the looming ‘21 notes maturity and the corresponding RBL springing maturity, the debtors’ retained professionals shifted over to restructuring talks with an ad hoc committee of noteholders. The debtors also drew down $650mm on their revolver to ensure adequate go-forward liquidity (and, cough, avoid the need for a relatively more expensive DIP credit facility). After what sounds like serious deliberation (and opposition from the ad hoc committee), the debtors also opted to forgo the $190mm maturity payment on the convertible notes due April 1.

The debtors filed the case with the framework of a restructuring support agreement (aka a term sheet). That framework would equitize the converts and the unsecured notes, giving them 97% of the equity (for now … debt is also still under consideration). Unsecured claims will be paid in full. Existing equity would receive 3% of post-reorg equity and warrants. Post-reorg management will get 8% of the post-reorg equity. In total, this would amount to the evisceration of over $2b worth of debt. 😬

Speaking of management, a lot of people were up in arms over this bit in the debtors’ Form 8-K filed to announce the bankruptcy filing and term sheet:

We’d love to hear how this ISN’T a subversion of code provisions regarding KEIPS/KERPS. Seriously, write us: petition@petition11.com. Ensure stability huh? Tell us: WHERE THE F*CK ARE THESE GUYS GOING TO GO IN THIS ENVIRONMENT? But at least they’re passing up their (WILDLY WORTHLESS) equity awards and bonus payments. FFS.

Ok, fine. Maybe there were contractual provisions that needed to be taken into account. And maybe the alternative — sh*tcanning management and rejecting the employment contracts — doesn’t fit the construct of leaving an umimpaired class of unsecured creditors. Equity is wildly out-of-the-money and getting a tip here anyway. This, therefore, is just a transfer of value from the noteholders to the management. We have to assume that the noteholders, then, were aware of this before it happened. If not, they should be pissed. And the Directors — who make between $180,000 and $305,000 a year — ought to be questioned by said noteholders about potential breaches of duties.

• Jurisdiction: S.D. of TX (Judge Jones)

• Capital Structure:

• Professionals:

  • Legal: Kirkland & Ellis LLP (Stephen Hessler, Brian Schartz, Gregory Pesce, Anna Rotman) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Veronica Polnick)

  • CRO: Stein Advisors LLC (Jeffrey Stein)

  • Financial Advisor: Alvarez & Marsal LLC (Julie Hertzberg)

  • Investment Banker: Moelis & Company

  • Claims Agent: Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

  • RBL Agent: JPMorgan Chase Bank NA

  • Ad Hoc Committee of Noteholders

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Alice Beslisle Eaton, Michael Turkel, Omid Rahnama) & Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)

    • Financial Advisor: PJT Partners LP

  • Creditor: Caliber North Dakota LLC

    • Legal: Weil Gotshal & Manges LLP (Alfredo Perez, Brenda Funk)

Echo Energy Partners I LLC

March 24, 2020

Soooooo, this is an odd one. On March 24, 2020, Oklahoma City-based Echo Energy Partners I LLC, an independent oil and gas company — primarily natural gas from the Anadarko Basin — filed for bankruptcy in the Southern District of Texas. It was a bare bones filing. For well over a week, the docket sat empty with no real substantive pleadings filed or definitive information coming through about the case. Then, finally, over a week later, the company filed more actual first day motions and its First Day Declaration. Usually the automatic stay doesn’t apply to the debtors’ work but, yeah, sure, more power to them.

Anyway, now we know what’s up. And it’s not particularly original or interesting. The upshot? Apparently nobody wants to finance “gas-heavy, capital intensive, non-operated wells with longer production curves” in a $2.00 per million Btu environment let alone a now-sub-$2.00 per million Btu environment. The debtor, therefore, ran into severe liquidity constraints — a situation compounded by third-party operators like Continental Resources inc. ($CLR) initiating forced forfeitures of the debtor’s working interest in key wells.

What’s the plan now? Well, it ain’t looking good. The debtor has a $8.5mm DIP commitment from its pre-petition lender, Texas Capital Bank ($TCBI), and hopes to use the chapter 11 process to pursue a sale of its business.

• Jurisdiction: S.D. of Texas (Judge Jones)

• Capital Structure: $80mm RCF (Texas Capital Bank) & $165mm notes (HPS Investment Partners LLC)

• Professionals:

  • Legal: Bracewell LLP (William A. Wood III, Jason G Cohen)

  • Manager: John T. Young Jr.

  • Financial Advisor: Opportune LLP (Gregg Laswell)

  • Claims Agent: Stretto (*click on the link above for free docket access)

Pioneer Energy Services Corp.

March 1, 2019

San Antonio-based oilfield services provider Pioneer Energy Services Corp. and several affiliates (the “debtors”) filed “straddle” prepackaged chapter 11 bankruptcy cases on Sunday in what amounts to a true balance sheet restructuring. Will this kickoff a new slate of oil and gas related bankruptcy filings? 🤔

The debtors provide well servicing, wireline and coiled tubing services to producers in Texas and the Mid-Continent and Rocky Mountain regions; they also provide contract land drilling services to operators in Texas, Appalachia, and the Rocky Mountain region. International operations in Colombia are not part of the bankruptcy cases. Due to the…shall we say…unpleasant…atmosphere for oil and gas these last few years — which, clearly undermined demand for their services and, obviously, revenue generation — the debtors determined that they couldn’t continue to service their existing capital structure. Alas, bankruptcy.

Hold on: not so fast. We previously wrote in “⛽️Storm Clouds Forming Over Oil & Gas⛽️,” the following:

And so it’s no wonder that, despite a relative dearth of oil and gas bankruptcy filings in 2020 thus far, most people think that (a) the E&P and OFS companies that avoided a bankruptcy in the 2015 downturn are unlikely to avoid it again and (b) many of the E&P and OFS companies that didn’t avoid a bankruptcy in the 2015 downturn are unlikely to avoid the dreaded Scarlet 22….

Sure, Pioneer hasn’t filed for bankruptcy before. But it has been in a constant state of restructuring ever since 2015. Per the debtors:

…in 2015 and 2016, Pioneer reduced its total headcount by over 50%, reduced wage rates for its operations personnel, reduced incentive compensation and eliminated certain employment benefits. In 2016, the Company closed ten field offices to reduce overhead and associated lease payments. At the same time, the Company lowered its capital expenditures by 77% to primarily routine expenditures that were necessary to maintain its equipment and deferred discretionary upgrades and additions (except those that it had previously committed to make during the 2014 market slowdown).

And:

Since the beginning of 2015 through the end of 2018, the Company has liquidated nonstrategic or non-core assets. Specifically, Pioneer has sold thirty-nine (39) non-AC domestic drill rigs, thirty-three (33) older wireline units, seven (7) smaller diameter coiled tubing units and various other drilling and coiled tubing equipment for aggregate net proceeds of over $75 million. As of September 30, 2019, the Company reported another $6.2 million in assets remaining held for sale, including the fair value of buildings and yards for one domestic drilling yard and two closed wireline locations, one domestic SCR drilling rig, two coiled tubing units and spare support equipment.

Annd:

In the first quarter of 2019, the Company continued its cost-reduction initiatives and operational adjustments by expanding the roles and related responsibilities of several of its executive leaders to further leverage their existing talents to the entire organization.

In other words, these guys have been gasping for air for five years.

Relatively speaking, the debtors capital structure isn’t even that intense:

1. $175mm Term Loan (Wilmington Trust NA)

2. $300mm 6.125% ‘22 senior unsecured notes (Wells Fargo Bank NA)

Yet with oil and gas getting smoked the way it has, it was still too much. So what now?

The prepackaged plan would give the term lenders cash (from a rights offering) and $78.125mm in new secured bonds (PETITION Note: we’re betting there are a bunch of CLOs here). The unsecured noteholders will get either all of the equity or 94.25% of the equity depending upon what the interest holders do; they’ll also get rights to participate in the rights offering. If the interest holders vote to accept the plan, they’ll get 5.75% of the equity and rights to participate in the rights offering; if they reject the plan, they’ll get bupkis and the noteholders will get 100% of the equity (subject to dilution). General unsecured claimants will get paid in full. Management will put in money as part of the rights offering and an ad hoc group of the unsecured noteholders (Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, and Whitebox Advisors LLC) agreed to backstop substantially all of the rights offering (and will receive an 8% premium for their commitment). The cases will be supported by a $75mm DIP. This thing is pretty buttoned up. Confirmation is expected within 45 days.

The end result? The debtors will emerge with $153mm of debt on balance sheet (the $78.125mm in new secured bonds and a $75mm exit ABL). Time will tell whether or not this remains too much.*

*The risk factors here are particularly interesting because all of them are very real. If the oil patch does suffer, as expected, the debtors’ concentration of business among their top three clients (66% of revenue) could be especially troubling — depending on who those clients are.

• Jurisdiction: S.D. of Texas (Judge Jones)

• Capital Structure: see above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Elizabeth McColm, Brian Bolin, William Clareman, Eugene Park, Grace Hotz, Sarah Harnett) & Norton Rose Fulbrights US LLP (William Greendyke, Jason Boland, Robert Bruner, Julie Goodrich Harrison)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Lazard Freres & Co. LLC

  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP Lender ($75mm): PNC Bank NA

    • Legal: Blank Rome LLP (James Grogan, Broocks Wilson)

  • Prepetition Term Loan Agent: Wilmington Trust NA

    • Legal: Covington & Burling LLP

  • Ad Hoc Group of Prepetition Term Loan Lenders

    • Legal: Vinson & Elkins LLP (David Meyer, Paul Heath, Harry Perrin, Steven Zundell, Zachary Paiva)

  • Ad Hoc Group of Unsecured Noteholders: Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, Whitebox Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris, Erik Jerrard, Xu Pang) & Haynes and Boone LLP (Charles Beckham)

    • Financial Advisor: Houlihan Lokey

Arsenal Resources Development LLC

November 8, 2019

An “array of resources available for a certain purpose” connotes something positive — an advantage to the party in possession of the resources. Of the arsenal. Bankruptcy sure loves to flip things on their head. We’re looking at you Arsenal Resources Development LLC.

Arsenal Resources Development LLC and 16 affiliated companies filed for bankruptcy in the District of Delaware on Friday. This marked the second prepackaged chapter 11 filing for entities affiliated with the Arsenal enterprise in less than 12 months. In February, Arsenal Energy Holdings LLC, a holding company, filed a 9-day prepackaged bankruptcy to effectuate a debt-for-equity swap of $861mm of subordinated notes. We wrote at the time:

Pursuant to its prepackaged plan of reorganization, the company will convert its subordinated notes to Class A equity. Holders of 95.93% of the notes approved of the plan. The one holdout — the other 4+% — precipitated the need for a chapter 11 filing. Restructuring democracy is a beautiful (and sometimes wasteful) thing.

And:

The company, itself, is about as boring a bankruptcy filer as they come: it is just a holding company with no ops, no employees and, other than a single bank account and its direct and indirect equity interests in certain non-debtor subs, no assets. The equity is privately-held.

More of the action occurred out-of-court upon the recapitalization of the non-debtor operating company. Because of the holdout(s), the company, its noteholders, the opco lenders (Mercuria) and the consenting equityholders agreed to consummate a global transaction in steps: first, the out-of-court recap of the non-debtor opco and then the in-court restructuring of the holdco to squeeze the holdouts. For the uninitiated, a lower voting threshold passes muster in-court than it does out-of-court. Out-of-court, the debtor needed 100% consent. Not so much in BK. (emphasis added).

Critically, the February restructuring did not successfully amend any of the company’s gathering agreements. Trade creditors were unimpaired and unaffected (economically).

With this bankruptcy filing, the operating companies are now in chapter 11. Which makes statements like these…

…technically incorrect. This isn’t a Chapter 22 per se. This isn’t even what we’d dub going forward, a Crapter 22-12 (two bankruptcy filings in 12 months a la Hercules Offshore Inc., another misleadingly-strong-named-failure-of-an-enterprise) or the “Two-Year Rule” violating Crapter 22-24 (two bankruptcy filings in 24 months a la Gymboree).* This is actually David’s Bridal in reverse: an out-of-court restructuring quickly followed in short order by an in-court restructuring. This is, technically, a “reverse Chapter 11.5.” We know…this is getting to be a bit much, but work with us here, folks: when the restructuring process becomes this much of a joke, jokester labels apply.

Founded in 2011, Arsenal is an independent exploration and production company that acquires and develops “unconventional” nat gas resources in the Appalachian Basin; it has 177k acres in the Marcellus Shale. The company is headquartered in Pennsylvania but its primary acreage and horizontal wells exist in West Virginia. The company had $120.1mm of revenue in ‘18 and appears on track to more or less match that in ‘19 ($59.3mm through June’s end, so, okay, maybe “less”).

In its latest Disclosure Statement, the company has the cajones to spitball the following:

“The Company creates value by leveraging its technical expertise and local knowledge to assemble a portfolio of concentrated, high-quality drilling locations, develop its acreage position safely and efficiently and install midstream infrastructure to support its upstream activities.”

Except, all we see here — across two recapitalization transactions in less than 12 months — is value destruction across the enterprise.** To be fair, the natural gas price environment has been far from accommodating over the last year. It is primarily for that reason — and a still too-levered balance sheet — that the company is in bankruptcy. This is telling:

…following the Prior Plan Effective Date, the E&P industry’s declining trend continued through fiscal year 2019, as exhibited by the following chart, depicting a natural gas futures-strip priced on the Prior Plan Effective Date compared against the same strip priced on October 22, 2019. As shown in the chart, since the Prior Plan Effective Date, realized gas prices have been on average 8.1% below futures strip (and the forward looking October 22, 2019 strip is on average 8.6% lower today than February 14, 2019 strip). Indeed, since the Prior Plan Effective Date, through September 30, 2019, 31 E&P companies have filed for chapter 11 protection. This represents a significant increase compared to the 22 E&P companies that filed for chapter 11 during the first 9 months of 2018.

The new plan, which has been agreed upon by all three of the major constituencies party to the capital structure, will:

• provide the Debtors with access to $90mm in DIP credit from Citibank NA, the debtors’ prepetition RBL Lenders and, upon confirmation and emergence from bankruptcy, a $130mm exit facility;

• convert the term loan and seller notes into 100% of the equity in the reorganized debtors (subject to dilution) from a $100mm equity infusion from lenders Chambers and Mercuria.

This filing also requires — as a condition to the equity infusion — the implementation of amendments to two of five of the debtors’ gathering agreements and the rejection, assumption or consensual amendment of the remaining three agreements. Why? The debtors note:

“…certain of the Gathering Agreements impose significant minimum volume commitments (“MVCs”) at uneconomic fixed prices, thereby requiring ARE, the debtor party to the agreements, to pay for pipeline access, whether or not it is fully utilizing that capacity.”

Significantly, the debtors have reached agreement with the two gathering agreement counterparties on more realistic obligations in the current nat gas environment. Accordingly, the debtors hope to have this case completed by the end of February.

*Credit for “Crapter 11” belongs to loyal reader, David Guess, a Partner, who, congratulations are in order, recently moved over to Greenberg Traurig in Irvine CA. Cheers David!

**That is, unless we factor in the professionals. Simpson Thacher & Bartlett LLP, Alvarez & Marsal LLC, PJT Partners Inc., and Prime Clerk LLC all get a second bite at the apple. Who says that debtor-work doesn’t have recurring revenue??

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: See Above.

• Professionals:

  • Legal: Simpson Thacher & Bartlett LLP (Michael Torkin, Kathrine McLendon, Nicholas Baker, William Russell Jr., Edward Linden, Jamie Fell) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kara Coyle, Ashley Jacobs)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: PJT Partners Inc. (Avi Robbins)

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Prepetition RBL Agent and DIP Agent: Citibank NA

    • Legal: Paul Hastings LLP (Andrew Tenzer) & Richards Layton & Finger PA (Mark Collins, David Queroli)

    • Financial Advisor: RPA Advisors

  • Gathering Agreement Counterparty: Equitrans Midstream Corporation ($ETRN)

    • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway, Mark Pfeiffer, TImothy Palmer)

Sheridan Holding Company II, LLC

September 15, 2019

Houston-based Sheridan Holding Company II LLC and 8 affiliated debtors filed a chapter 11 bankruptcy case in the Southern District of Texas with a nearly-fully-consensual prepackaged plan of reorganization. The plan, once effective, would eliminate approximately $900mm(!) of pre-petition debt. The case is supported by a $100mm DIP credit facility (50% new money).

Why so much debt? While this is an oil and gas story much like scores of other companies we’ve seen march through the bankruptcy court doors, the business model, here, is a bit different than usual. Sheridan II is a “fund”; it invests in a portfolio of working interests in mature onshore producing properties in Texas, New Mexico and Wyoming. Like Matt Damon in “Promised Land,” the debtors scour God’s country in search of properties, acquires working interests in those properties, and then seeks to deploy their special sauce (“application of cost-effective reinvestments, operational improvements, and enhanced recovery programs to the acquired assets”) to eke out product and, ultimately, sell that sh*t at a profit. This, as you might suspect, requires a bunch of capital (and equity from LPs like Warburg Pincus).* Hence the $1.1b of debt on balance sheet. All of this is well (pun intended) and good, provided the commodity environment cooperates. Which, we all know all too well, has not been the case in recent years. Peace out equity. Peace out sub debt.

Interestingly, some of that debt was placed not too long ago. Confronted with the oil and gas downturn, the debtors took the initiative to avoid bankruptcy; they cut off distributions to LPs, took measures to decrease debt, cut opex, capex and SG&A, and engaged in a hedging program. In 2017, the debtors raised $455mm of the subordinated term loan (with PIK interest galore), while also clawing back 50% of distributions previously made to LPs to the tune of $64mm. Everyone needed to have skin in the game. Alas, these measures were insufficient.

Per this plan, that skin is seared. The revolving lenders and term lenders will receive 95% of the common stock in the reorganized entity with the subordinated term lenders getting the remaining 5%. YIKES. The debtors estimate that the subordinated term lenders will recover 2.6% of the amount of their claims under the proposed plan. 2.6% of $514mm = EPIC VALUE DESTRUCTION. Sweeeeeeeeet. Of course, the limited partners are wistfully looking at that 2.6%. Everything is relative.

*****

Some additional notes about this case:

• The hope to have confirmation in 30 days.

• The plan includes the ability to “toggle” to a sale pursuant to a plan if a buyer for the assets emerges. These “toggle” plans continue to be all of the rage these days.

• The debtors note that this was a “hard fought” negotiation. We’ve lost count of how many times professionals pat themselves on the backs by noting that they arrived at a deal, resolving the issues of various constituencies with conflicting interests and positions. First, enough already: this isn’t exactly Fallujah. You’re a bunch of mostly white males (the CEO of the company notwithstanding), sitting around a luxury conference table in a high rise in Manhattan or Houston. Let’s keep some perspective here, people. Second, THIS IS WHAT YOU GET PAID $1000+/hour to do. If you CAN’T get to a deal, then that really says something, particularly in a situation like this where the capital structure isn’t all-too-complex.

• The bulk of the debtors’ assets were purchased from SandRidge Energy in 2013. This is like bankruptcy hot potato.

• Independent directors are really becoming a cottage industry. We have to say, if you’re an independent director across dozens of companies, it probably makes sense to keep Quinn Emanuel on retainer. That way, you’re less likely to see them on the opposite side of the table (and when you do, you may at least temper certain bulldog tendencies). Just saying.

Finally, the debtors’ bankruptcy papers provide real insights into what’s happening in the oil and gas industry today — particularly in the Permian Basin. The debtors’ assets mostly rest in the Permian, the purported crown jewel of oil and gas exploration and production. Except, as previously discussed in PETITION, production of oil out of the Permian ain’t worth as much if, say, you can’t move it anywhere. Transportation constraints, while relaxing somewhat, continue to persist. Per the company:

“Prices realized by the Debtors for crude oil produced and sold in the Permian Basin have been further depressed since 2018 due to “price differentials”—the difference in price received for sales of oil in the Permian Basin as compared to sales at the Cushing, Oklahoma sales hub or sales of sour crude oil. The differentials are largely attributable to take-away capacity constraints caused by increases in supply exceeding available transportation infrastructure. During 2018, Permian Basin crude oil at times sold at discounts relative to sales at the Cushing, Oklahoma hub of $16 per barrel or more. Price differentials have narrowed as additional take-away capacity has come online, but crude oil still sells in the Permian Basin at a discount relative to Cushing prices.”

So, there’s that teeny weeny problemo.

If you think that’s bad, bear in mind what’s happening with natural gas:

“Similarly, the Henry Hub natural gas spot market price fell from a peak of $5.39 per million British thermal units (“MMBtu”) in January 2014 to $1.73 per MMBtu by March 2016, and remains at approximately $2.62 per MMBtu as of the Petition Date. In 2019, natural gas prices at the Waha hub in West Texas have at times been negative, meaning that the Debtors have at times either had to shut in production or pay purchasers to take the Debtors’ natural gas.”

It’s the natural gas equivalent of negative interest rates. 😜🙈

*All in, this fund raised $1.8b of equity. The Sheridan Group, the manager of the debtors, has raised $4.6b across three funds, completing nine major acquisitions for an aggregate purchase price of $5.7b. Only Sheridan II, however, is a debtor (as of now?).

• Jurisdiction: S.D. of Texas (Judge Isgur)

• Capital Structure: $66 RCF (Bank of America NA), $543.1mm Term Loan (Bank of America NA), $514mm ‘22 13.5%/17% PIK Subordinated Term Loans (Wilmington Trust NA) — see below.

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Steven Serajeddini, Spencer Winters, Stephen Hackney, Rachael Marie Bazinski, Jaimie Fedell, Casey James McGushin) & Jackson Walker LLP (Elizabeth Freeman, Matthew Cavenaugh)

  • Board of Directors: Alan Carr, Jonathan Foster

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP

  • Financial Advisor: AlixPartners LLP

  • Investment Banker: Evercore Group LLC

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Administrative agent and collateral agent under the Sheridan II Term Loan Credit Agreements: Bank of America NA

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Stephen Piraino, Nathaniel Sokol)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Administrative Agent under the Sheridan II RBL: Bank of America NA

    • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman, Andrew Geppert)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Ad Hoc Group of Subordinated Term Loans (Pantheon Ventures US LP, HarbourVest Partners LP)

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Gabriel Morgan, Clifford Carlson)

    • Financial Advisor: PJT Partners LP

  • Limited Partner: Wilberg Pincus LLC

    • Legal: Willkie Farr & Gallagher LLP (Brian Lennon)

Alta Mesa Resources Inc.

September 11, 2019

Man. We nailed this one. Once Alta Mesa Holdings LP’s borrowing base got redetermined down, it was f*cked.*

As we’ve previously covered, Alta Mesa Resources Inc. is an independent oil and nat gas exploration and production company focused on the Sooner Trend Anadarko Basin Canadian and Kingfisher County (otherwise known as the “STACK”) in Oklahoma. It has an upstream business and, through a non-debtor entity it is now suing in an adversary proceeding (Kingfisher Midstream LLC), a midstream business.

The fact that another oil and gas company is now in bankruptcy** is, frankly, fairly uninteresting: the debtors blame the usual factors for their demise. Depressed oil prices ✅. Over-leverage (here, a $368mm RBL and $509mm in unsecured notes)✅. Liquidity constraints✅. We’ve now seen these story — and those factors — several dozen times this year alone. Like many of its oil and gas predecessors, these debtors, too, will explore a “value-maximizing sale of all or substantially all of the [d]ebtors’ assets” while also looking at a restructuring along with non-debtor affiliates. Par for the course.

What’s most interesting to us on this one — and relatively rare in bankruptcy — is the fact that the company emanated out of a “special purpose acquisition company or “SPAC” for short (these are also known as “blank check” companies). For the uninitiated, SPACs are generally shady-as-sh*t investment vehicles with pseudo-private-equity-like characteristics (including the enrichment of the sponsors) that are offered via IPO to idiot public equity investors who are enamored with putting money behind allegedly successful founders/investors. They have a long and sordid history but, as you might imagine in frothy AF markets like the one we’re currently experiencing, they tend to rise in popularity when people have lots of money to put to work and limited avenues for yield baby yield. According to this “SPAC 101” presentation by the law firm Winston & Strawn LLP, “[i]n 2017, there were 32 SPAC IPOs raising a total of $8.7 billion, the highest total since 2007.” That number rose above $10b in 2018. Some recent prominent examples of SPACs include: (a) the proposed-but-called-off combination of SPAC Leo Holdings Corp. ($LHC) with Chuck E. Cheese, (b) Chamath Palihapitiya’s investment in Richard Branson’s Virgin Galacticspace initiative via his $600mm spac, Social Capital Hedosophia Holdings Corp ($IPOA), and (c) something closer to home for distressed players, Mudrick Capital Acquisition Corporation ($MUDS.U), founded by Jason Mudrick. The latter, despite being 18 month post-close, has yet to deploy its capital (which is notable because, typically, SPACs have a two-year life span before capital must be returned to investors).

In late 2016, Riverstone Investment Group LLC formed its SPAC and commenced an IPO in Q1 ‘17. The IPO generated proceeds of over $1b. These proceeds were placed in a trust account — standard for SPACs — and ultimately used to partially fund the “business combination” that started the sh*tshow that we all now know as Alta Mesa. That transaction closed in February 2018. Public shareholders were now in the mix.

So, how did that work out for them? Well, here we are:

So, yeah. Add this one to the list of failed SPACs. The lawyers sure have: AMR, certain of its current and former directors, Riverstone Investment Group LLC and Riverstone Holdings LLC were named defendants in securities class action lawsuits in both United States District Courts for the Southern District of New York and the Southern District of Texas that allege that the defendants “disseminated proxy materials containing materially false or misleading statements in connection with the Business Combination….” The debtors are obviously calling these claims “meritless.”

So, there you have it folks. An inauspicious start has brought us to a suspect penultimate chapter. There is no purchaser in tow, no clear direction for the bankruptcy proceeding, and an adversary proceeding that faces some recent unfavorable precedent (albeit in a different, less favorable, jurisdiction).

We can’t wait to see where this flaming hot mess goes from here.

*We wrote:

PETITION Note: Ruh roh. Just like that, the lenders have put the squeeze on AMH. AMH meet world of hurt. World of hurt, meet AMH.

“As provided under the Alta Mesa RBL, AMH will elect to repay the excess utilization in 5 equal monthly installments of $32.5 million, the first of which will be due in September 2019. As of July 31, 2019, AMH had cash on hand of approximately $79.7 million.”

PETITION Note: HAHAHAHAHA, yeah, sure it will. And we have a bridge to sell you.

Re-engage the bankruptcy countdown. Maybe…MAYBE…some crazy macroeconomic shock will occur and oil prices will shoot up to $1900/barrel. Like, maybe a meteor strikes Earth and annihilates Saudi Arabia, completely wiping it off the map. In that scenario, yeah, sure, AMH is copacetic.

Interestingly, as we write this, Yemeni Houthi rebels are taking credit for a drone attack that has shut down half of Saudi Arabia’s oil output. Per the WSJ:

The production shutdown amounts to a loss of about five million barrels a day, the people said, roughly 5% of the world’s daily production of crude oil. The kingdom produces 9.8 million barrels a day.

Meteors. Drones. Let’s not split hairs.

**10% of the top 30 creditors features energy companies with prior BK experience including greatest hits like Chaparral Energy LLC, Weatherford US LP (another recent Latham client), and Basic Energy Services LP.

• Jurisdiction: S.D. of Texas (Judge Isgur)

• Capital Structure: $368mm RBL (Wells Fargo Bank NA), $509mm 7.785% unsecured notes (US Bank NA)

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Caroline Reckler, Annemarie Reilly, Brett Neve, Andrew Sorkin) & Porter Hedges LLP (John F. Higgins IV, Eric English, Aaron Power, M. Shane Johnson)

  • Board of Directors: James Hackett (Riverstone), Pierre Lapeyre Jr. (Riverstone), David Leuschen (Riverstone), Donald Dimitrievich (HPS), William McCullen, Sylvia Kerrigan, Donald Sinclair, Jeffrey Tepper, Diana Walters, Patrick Bartels, Marc Beilinson)

  • Financial Advisor/CRO: AlixPartners LLP (Robert Albergotti)

  • Investment Banker: Perella Weinberg Partners (Kevin Cofsky)

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Ad Hoc Noteholder Group (Bain Capital Credit LP, Firefly Value Partners LP, Leroy DH LP, PGIM Inc., PPM America Inc.)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Angela Libby, Stephanie Massman & (local) Rapp & Krock PC (Henry Flores, Kenneth Krock)

  • Issuing Lender: Wells Fargo Bank NA

    • Legal: Bracewell LLP (William A. Wood III, Jason G. Cohen)

  • Unsecured Note Indenture Trustee: US Bank NA

    • Legal: Blank Rome LLP (Ira Herman, James Grogan)

  • Creditor: Kingfisher Midstream LLC

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Susheel Kirpalani, Patrica Tomasco, Devin va der Hahn)

  • Equity Sponsors: Riverstone Investment Group LLC/HPS Investment Partners LLC

    • Legal: Vinson & Elkins LLP (David Meyer, Michael Garza, Harry Perrin)

  • Equity Sponsor: Bayou City Energy Management LLC

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Gregory Pesce, Anna Rotman)

  • Equity Sponsors: Orbis Investment Management Limited, High Mesa Holdings LP,

PetroShare Corp.

September 4, 2019

When most people think of oil and gas they think of Texas. This makes sense given production volume but there are other areas of exploration and production in the United States that garner far less attention. Like Colorado.

Bankruptcy professionals have some experience already in Colorado. Bonanza Creek Energy Inc. ($BCEI), as just one example, filed for chapter 11 bankruptcy in early 2017. Given all of the oil and gas activity in bankruptcy court lately, 2019 is the new 2017.

CASE IN POINT (wink to one of our readers), PetroShare Corp. ($PRHR), a developer of crude oil and gas properties in the Rocky Mountain/mid-continent region of the US, filed for bankruptcy on September 4, 2019, in the District of Colorado. The debtor did us a favor in filing its minutes from a March 25, 2019 board meeting. It provided a bit of unintentional comedy.

Noting that, amidst a default under its secured credit agreement, the debtor’s lender representatives both resigned from the board and terminated negotiations related to a second sale of certain company assets (PETITION Note: the company had already sold $15.5mm of non-operating assets, the proceeds of which are held by the company’s lenders), the minutes reflect how recent political machinations affected the oil and gas environment in Colorado:

“…in terminating the negotiations, the Lender group and the potential equity group cited the recent dramatic changes in the Colorado political climate reflected in the proposed SB 19-181 which seeks to change the charter and direction of the Colorado Oil and Gas Conservation Commission and the potential detriment to local oil and gas development. He also noted the recently-approved 6 month moratorium on new drilling permits in Adams County, Colorado, where the bulk of the Company’s properties are located.”

Whoops. It’s hard to generate revenue when your ability to produce properties is hindered by new local regulations. That’s what you call a post-investment intervening negative externality.

Consequently, the company engaged in discussions with its lenders. Per the minutes:

“…the representatives of the Administrative Agent suggested that the Company consider other-recapitalization options including, but not limited to, filing a friendly Chapter 11 bankruptcy and then working with the Lenders to file a pre-packaged or similar reorganization plan to address trade debt, the senior loan and the unsecured noteholders.”

To which we have to say:

Typically a pre-packaged bankruptcy, by definition, is agreed to PRIOR TO a bankruptcy filing. It’s not all willy-nilly, “we filed, now let’s be ‘friendly’ and agree to sh*t.” Everything about that entry is amusing.

Subsequently, the company discussed a variety of options. Do they attempt additional sales? Do they solicit private equity interest? Is bankruptcy the right option. Per the minutes:

“Mr. Witsell passed along information that he had received from the law firm Polsinelli on the benefits and detriments of pursuing bankruptcy.”

It all sounds so cavalier. It’s like a pitch deck from Polsinelli just fell from the sky into management’s laps. These are the pros (shed debt, free and clear sales, screw trade) and these are the cons (stigma, court supervision, expensive AF)! Ready, set, FILE! Gotta love bankruptcy!

Jokes aside, the company attempted to avoid bankruptcy (as you might expect) and thought they had a buyer lined up that would consummate an out-of-court transaction. That buyer fell through, however, at the 11th hour. This left the company with a backup bidder who required a chapter 11 filing (because, like, they’re apparently a bit more sophisticated??). The company, therefore, will use the chapter 11 process to continue to market and try and maximize value in a competitive auction — assuming competitive bidders emerge in the midst of considerable regulatory headwinds.

• Jurisdiction: D. of Colorado (Judge Tyson)

• Capital Structure: $14.3mm secured debt, $9.3mm convertible notes

• Professionals:

  • Legal: Polsinelli PC (Trey Monsour, James Billingsley, William Meyer, James Bird, Caryn Wang)

  • Financial Advisor/CRO: MACCO Restructuring Group LLC (Drew McManigle, Kathy Mayle)

  • Investment Banker: Seaport Global Securities LLC

  • Claims Agent: BMC Group (*click on the link above for free docket access)

• Other Parties in Interest:

  • Secured Lenders: Providence Wattenberg, 5NR Wattenberg

  • Large Equityholders: Providence Energy Operators LLC & Cede & Co.

EPIC Companies LLC

August 26, 2019

Another day, another oil-related bankruptcy filing. Houston-based Epic Companies LLC and six affiliated companies filed for chapter 11 on August 26, 2019 in the Southern District of Texas (Judge Jones presiding) to effectuate a sale to its pre-petition and post-petition lender, White Oak Global Advisors LLC.* White Oak intends to credit bid $48.9mm and assume $40mm of the debtors’ debt. It then hopes to flip the assets — that’s right, flip the assets — to a secondary buyer, Alliance Energy Services LLC, for $40mm and the assumption of $35mm of debt. The debtors hope to consummate the transaction within 65 days. This is bankruptcy today folks: super speedy cases tied to aggressive DIP milestones. Why? In large part, because bankruptcy is too frikken inefficient and expensive to go about a sale transaction otherwise. This is why it’s imperative to have a robust pre-petition marketing process. Here, there’s the added element of the secondary sale.

Formed in Q1 2018, the debtors service the oil and gas industry through heavy lift, diving and marine, specialty cutting and well-plugging and abandonment services. Said another way, these guys work with oil and gas companies at the end of the well lifecycle.

Speaking of the end of lifecycles, the company has been in trouble from the get-go. After spending a year acquiring assets, the debtors already had to start divesting by April of 2019. White Oak foreclosed on equity interests in three entities in July 2019. The company still owns three heavy lift and diving vessels, other equipment, IP, and real property. They owe $106.9mm under a senior loan** and $124.8mm under a junior loan. Unsecured trade debt is $30mm. Other liabilities include litigations against the debtors’ vessels.

Why is this company in bankruptcy? They’re very to the point:

Like many in their industry, the downturn in oil and natural gas prices and other industry-related challenges negatively impacted the Debtors' liquidity position.

Consequently, White Oak called a default and has been driving the bus ever since: in July, White Oak informed management that it was done sinking money into this morass. Five days later, the debtors terminated 400 employees. 28 employees remain. Sadly, their future is decidedly more uncertain today than it was even two months ago.

*Prior to the voluntary filing, one of the debtors was involuntaried in Louisiana.

**Once White Oak exercised remedies, it then restated the debtors’ senior debt into three separate facilities. Acqua Liana, as junior lender, followed suit vis-a-vis the junior loan.

• Jurisdiction: S.D. of Texas (Judge Jones)

• Capital Structure: see above.

• Professionals:

  • Legal: Porter Hedges LLP (John Higgins, M. Shane Johnson, Genevieve Graham)

  • Financial Advisor/CRO: S3 Advisors LLC (“G2”) (Jeffrey Varsalone)

  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Prepetition Senior Loan Lender & Postpetition Lender & Stalking Horse Purchaser: White Oak Global Advisors LLC

  • Prepetition Junior Loan Lender: Acqua Liana Capital Partners LLC

PES Holdings LLC

July 21, 2019

Picture the private equity associate. He’s sitting at his desk, twiddling his thumbs, looking for something to do. All is good in the world: the portfolio is humming along, he hasn’t gotten roped into a lose/lose golf tournament with the senior partners in a while, and he just wants to lay low and ride out the summer if he can. Then, suddenly, on one fateful summer day in June, one of his portfolio companies just up -and-decides to randomly explode — or, as the company puts it, suffer a “historic, large-scale, catastrophic accident.” Suddenly he’s mopping the floor with his jaw.

This sudden turn of events is particularly stupefying when you consider that the portfolio company — PES Holdings LLC, aka Philadelphia Energy Solutions — happens to be a 150 year-old oil refining complex that also happens to be (i) the largest on the United States Eastern seaboard (representing approximately 28% of the crude oil refining capacity on the east coast), and (ii) an employer of 950 employees. What are the possible knee-jerk reactions here? Are they:

1. “Oh sh*t, there goes our portfolio for the year!”

2. “F******ck, did our investment literally just go up in smoke?”

3. “Am I going to have a job tomorrow?”

Then there are likely the secondary considerations:

1. “How will the Commonwealth of Pennsylvania and the City of Philadelphia fulfill their energy needs?”

2. “Oh no! Did anyone die??!?”

That’s right: we’re cynical AF. After those two waves of initial thoughts and after a deep breath, we bet these were the next questions:

1. “Do we have to file this thing for ANOTHER bankruptcy now?”

2. “How robust is our insurance coverage? What are our insurance premiums and can we keep paying them to ensure coverage?”

3. “Is this an opportunity? How do we transfer all of the risk and best position ourselves to drive equity value here?”

The latter two considerations — as heartless and lacking in empathy as they may be — are highly realistic. And highly relevant, considering the explosion and attendant fire on June 21 forced the company to shut down its plant. The timing couldn’t have been worse: the explosion took place mere days after the company finalized the implementation of a new intermediation facility. Now, though, all “momentum” is lost: the company is currently inoperable and will require an extensive rebuild: at limited capacity and with massive fixed operational costs, the company would have burned (pun most definitely intended) through $100mm in liquidity within a few weeks. Cue the chapter 22 bankruptcy filing.*

Of course, prior to the filing, the company engaged in dialogue with its insurers:

The Debtors also immediately began a process to engage with their insurers—as it relates to property and business interruption insurance claims for the losses caused by the Girard Point Incident—to advance a dialogue toward an immediate advance and a global resolution that will allow the Debtors to restore their operations. The Debtors have yet to obtain such an advance.

Show us an insurer who is ready and willing to fork over proceeds on a moments notice and we’ll show you a bridge we’re selling.

The Debtors’ goal in the near term remains continuing to preserve the safe operation of the Refining Complex while they seek to recover as quickly as possible on their property and business interruption insurance claims and pursue various transactions to preserve their operations and maximize value.

We’re not talking about peanuts here, folks:

The Debtors have $1.25 billion in property and business interruption insurance coverage to protect against these kinds of losses (in addition to other insurance policies that cover other aspects of the Girard Point Incident). The Debtors are working with the insurers under that program to make the Debtors whole for the physical loss of the refinery and the resulting interruption of the Debtors’ business. These insurance proceeds are the very heart of these chapter 11 cases: the sooner the Debtors can recover, the sooner the business can complete its recovery.

While the company waits for the insurers to cough up some cash, it, obviously, needs to focus on safety issues and fire-related cleanup. To that end, it secured a $100mm DIP commitment from certain of its term loan lenders and continues to engage in discussions with ICBC Standard Bank PLC about a dual-DIP structure that would avail the company of even more liquidity. Ultimately, the company hopes to reorganize as a going concern. The extent to which the insurers play ball will dictate whether that’s possible. Something tells us there are some risk analysts combing through those policies with a fine tooth looking for any and all exemptions that they can pull out of their a$$es.

*According to the company, the first chapter 11 filing: “(i) secured a capital infusion of approximately $260 million; (ii) extended the Debtors’ debt maturities through 2022; (iii) reduced the Debtors’ anticipated debt service obligations by approximately $35 million per year; (iv) provided the Debtors with access to a new intermediation facility; and (v) provided the Debtors with relief from certain regulatory obligations.”

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: see below

• Professionals:

  • Legal: Kirkland & Ellis LLP (Edward Sassower, Steven Serajeddini, Matthew fa*gen, Michael Slade, Allyson Smith Weinhouse, Patrick Venter, Nacif Taousse, Whitney Becker) & Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, James O’Neill, Peter Keane)

  • CRO: Stein Advisors LLC (Jeffrey Stein)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: PJT Partners LP

  • Claims Agent: Omni Management Group (*click on the link above for free docket access)

• Other Parties in Interest:

Shale Support Global Holdings LLC

July 11, 2019

When privately-owned companies that most people have never heard of file for bankruptcy, it naturally raises the following logical question: with oil and gas once again imploding, how many off-the-run companies are going to wind their way into bankruptcy court? 🤔 We reckon quite a number.

Shale Support Global Holdings LLC, a private Louisiana-based proppant supplier to oilfield servicing companies that, in turn, service E&P companies, filed for bankruptcy in the Southern District of Texas. The company and 7 affiliated debtors (the “Debtors”) have little by way of assets ($3.15mm) and much more by way of debt ($127.8mm). MOR Bison LLC and BBC Holding LLC own 69.24% and 29.67% of the company, respectively.

The company started in 2014 to solve the problem of expensive logistics costs emanating out of the transport of sand to frac sites. The company sought to vertically integrate the ownership of sand mines with, among other things, a drying facility and a transload facility; its mines are in Mississippi. Given what has occurred in oil and gas country since 2014, it seems abundantly clear that the timing here was just a bit off. “How off,” you ask? Per the Debtors:

Demand for frac sand is significantly influenced by the level of well completions by E&P and OFS companies, which depends largely on the current and anticipated profitability of developing oil and natural gas reserves. As such, Shale Support’s business is highly correlated with well completions, which is, in-turn, is dependent on both commodity prices and producers’ ability to deliver oil to the market. Over the past five years, commodity prices have been highly volatile resulting in an unpredictable demand curve and a significant amount of OFS and E&P bankruptcies. Compounding these demand issues, Shale Support operates in a highly-competitive industry that has seen a dramatic increase in supply. This new supply has come from basin-specific regional producers (that have dramatically lower logistic costs) as well as larger, often better-capitalized, competitors. Regional suppliers and Shale Support’s larger competitors are both in a position to exert significant, downward pressure on pricing for proppants.

Said another way, as off as humanly possible. With a supply/demand imbalance in 2H ‘18, the company saw revenue fall over 40% in 2018. 😬 This was in large part due to the fact that, despite falling proppants prices, the Debtors are locked in to fixed cost contracts with railcar transport providers. With this mix plus over $127mm in outstanding debt obligations, liquidity became an issue.

For over a year now, the Debtors have been in a state of perpetual marketing. Piper Jaffrey & Co., the Debtors’ banker, could not, however, locate a buyer. In the midst of discussions with potential strategic and financial buyers, the price of frac sand continued to fall. Per the Debtors:

Unsurprisingly, no party submitted an indicative expression of interest, a non-binding offer or a valuation of Shale Support. The stated justification from these parties centered around market conditions, location of the reserves, quality of sand, availability of buyer cash, and consistent underperformance of business relative to forecasts.

Efforts to refinance the debt were equally unsuccessful given the declining asset value upon which a new loan would be based. Ultimately, the Debtors defaulted under their prepetition term loan agreement and, over the course of multiple months of waivers, negotiated with their lenders with the hope of “building consensus around a de-leveraging transaction.” Spoiler alert: there’s no prepackaged plan on file here nor is there a bid procedures motion accompanied by a stalking horse asset purchase agreement so suffice it to say that whatever consensus there might be is limited to the commitment of a $16.6mm DIP credit facility. And that forces the issue: under the DIP milestones, the Debtors must confirm a plan of reorganization within 98 days. Will the lenders equitize? Given the astounding job the first day papers do of making the assets seem attractive, is there a chance in hell a buyer emerges? Stay tuned.

• Jurisdiction: S.D. of Texas (Judge Jones)

• Capital Structure: $116mm ‘21 10% cash/12% PIK Term Loan (including interest, etc.), $11.6mm ‘21 ABL (Siena)

• Professionals:

  • Legal: Greenberg Traurig LLP (Shari Heyen, Karl Burrer, David Eastlake, Eric Howe)

  • Financial Advisor/CRO: Alvarez & Marsal LLC (Gary Barton)

  • Investment Banker: Piper Jaffray & Co. (Richard Shinder)

  • Claims Agent: Donlin Recano & Company Inc. (*click on the link above for free docket access)

• Other Parties in Interest:

  • Prepetition Term Loan & DIP Agent ($16.6mm): BSP Agency LLC (DIP Lenders: Providence Debt Fund III LP, Benefit Street Debt Fund IV LP, and Benefit Street Partners SMA LM LP).

    • Legal: Baker Botts LLP (Emanuel Grillo)

  • Prepetition Revolving Lender: Siena Lending Group LLC

    • Legal: Thompson Coburn LLP (David Warfield, Victor A. Des Laurier)

Weatherford International Plc

July 1, 2019

There hasn’t been a MASSIVE bankruptcy filing in a while.Windstream Holdings Inc.filed back in late February and while there’s been plenty of chapter 11 activity since, there hasn’t been anything quite as large in the last several months. There isnow. EnterWeatherford International Plc.

Late on Friday, Weatherford, an Irish public limited company, filed an 8-K with the SEC with a proposed plan of reorganization and disclosure statement; it and several affiliated debtors intend to file prepackaged chapter 11 cases in the Southern District of Texas on Monday, July 1.* The timing is appropriate: nothing screams “Independence!” like a massive chapter 11 bankruptcy filing that has the effect of eliminating six billion tyrannical dollars from the balance sheet. YEE HAW. G-D BLESS AMERICA.

Here is a snapshot of Weatherford’s pre and post-bankruptcy capital structure:**

And all of the action is at the pre-petition notes level of the cap stack.*** The holders of the $7.4b of pre-petition notes**** will walk away with 99% of the equity in the reorganized company (subject to various means of dilution) — a 63% recovery based on the offered valuation of the company. They will also receive up to $1.25b of new tranche b senior unsecured convertible notes and the right to participate in new tranche a senior unsecured notes. Every other class — but for existing equity (which will get wiped out) — will ride through as if this shabang ain’t even happening.

You must be wondering: how in bloody hell does a company rack up over $8b of debt? $8 BILLION!! That’s just oil and gas, darling.

Weatherford is a provider of equipment and services used in the drilling, evaluation, completion, production, and intervention of oil and natural gas wells; it operates in over 80 countries worldwide and has service and sales locations in nearly all of the oil and natural gas producing regions in the world. It operates in a highly commoditized industry and so the company dedicates millions each year to research and development in an effort to separate itself from the pack and provide value to end users that is unmatched in the market.

Which, by its own admission, it fails to do. All of that R&D notwithstanding, Weatherford nevertheless provide a commoditized product in a tough macro environment. And while all of that debt should have helped position the company to crush less-capitalized competitors, it ultimately proved to be an albatross.

To service this debt, the debtors require stability in the oil and natural gas markets at prices that catalyze E&P companies to drill, baby, drill. An oil field services company like Weatherford can only make money if there are oil operations to service. With oil and natural gas trading at low levels for years…well, you see the issue.Per the company’s 8-K:

The sustained drop in oil and gas prices has impacted companies throughout the oil and gas industry including Weatherford and the majority of its customers. As spending on exploration, development, and production of oil and natural gas has decreased so has demand for Weatherford’s services and products. The decline in spending by oil and gas companies has had a significant effect on the Debtors’ financial health. To illustrate, on a consolidated basis, the Company’s cash flows from operating activities have been negative $304 million, negative $388 million, and negative $242 million in fiscal years 2016, 2017, and 2018, respectively.

While not quite atUber Inc. ($UBER)levels, this company is practically lighting money on fire.

Relating to the competition:

The oilfield services and equipment industry is saturated with competition from various companies that operate in the same sector and the same regions of the world as Weatherford. The primary competitive factors include safety, performance, price, quality, and breadth of products and services. Weatherford also faces competition from regional suppliers in some of the sectors in which it operates as these suppliers offer limited equipment and services that are specifically tailored to the relevant local market. Some of the Company’s competitors have better financial and technical resources, which allows them to pursue more vigorous marketing and expansion activities. This heavily competitive market has impacted the Company’s ability to maintain its market share and defend or maintain the pricing for its products and services. Heavy competition has also impacted the Company’s ability to negotiate contract terms with its customers and suppliers, which has resulted in the Company accepting suboptimal terms.

The squeeze is on, ladies and gentlemen. As E&P companies look to cut costs in the face of increased pressure from investors to lean out, they are putting companies like Weatherford through the ringer. You bet your a$$ they’re getting “suboptimal terms.”

Compounding matters, of course, is the government:

…operations are also subject to extensive federal, international, state and local laws and regulations relating to environmental production, waste management and cleanup of hazardous materials, and other matters. Compliance with the various requirements imposed by these laws and regulations has also resulted in increased capital expenditures as companies in these sectors have had to make significant investments to ensure compliance.

Well GOSH DARN. If only Weatherford had unfettered ability to pollute the hell out of the countryside and our waters all of that debt could be paid off at par plus. Those gosh darn government hacks.

All of these factors combined to strain the debtors’ liquidity “for an extended period of time.” Accordingly, the company went into cost cutting mode.***** In Q4 ‘17, it eliminated 900 jobs to the tune of $114mm in annualized savings. In 2018, the company — with the assistance ofMcKinsey Restructuring & Transformation Services— continued with workforce reductions, facility consolidations, and other measures.

Yet, the squeeze continued. Per the company:

Despite implementing these efficient and strategic initiatives, the Company continued to face declining revenue and cash flow, as well as market challenges. Due to the Company’s increasingly tight liquidity, its key vendors began requiring shortened payment terms, including pay on delivery or prepayment for all supplies purchased by the Company. This contributed to additional pressure on liquidity that the Company could not sustain. Additionally, as discussed above, the highly competitive market that the Company operates in posed challenges for the Company in winning new bids, resulting in decreased revenue.

Weatherford was therefore forced to divest assets.YOU KNOW YOU’RE LEVERAGED TO THE HILT WHEN YOU SELL NEARLY $1B OF ASSETS AND IT BARELY MOVES THE NEEDLE. Sale proceeds were coming in just to go back out for debt service.The company had a leverage ratio of OVER 10X EBITDA. THIS IS AN UNMITIGATED F*CKING DISASTER. What’s actually astonishing is that the company notes that it retainedLazard Freres & Co LLC ($LZ)andLatham & Watkins LLPin December ‘18 and April ‘19, respectively. Taking them at their word (and we could have sworn Latham was in there much earlier than April),WHAT THE HELL WERE THEY WAITING FOR?$600mm of annual interest payments, pending maturities, untenable leverage relative to competitors, AND squeezing vendors and the company only got its sh*t together in April? They couldn’t possibly have been THAT inept. Ah, who are we kidding? We’re talking about bankruptcy here.

Now, though, the company has a deal****** and so the upshot is that it is well-positioned for a quick trip into bankruptcy. Indeed, it seeks plan confirmation no later than September 15, 2019 — a nice not-as-speedy-as-other-recent-prepacks-but-speedy prepack. To finance the cases, the company will seek approval of up to $750mm DIP revolver and a $1b DIP term loan. And it is optimistic that it will be well-positioned for the future:

We’ll see.

*The company will also push through Bermuda and Irish proceedings.

**JPMorgan Chase Bank NA ($JPM) is the agent on the prepetition term loan, the prepetition revolving credit agreement, and the A&R facility.

***Only three entities out of an organizational structure of 255 or so direct and indirect subsidiaries are on the hook for the prepetition notes, thereby limiting the number of actual debtor entities that will be subsumed by these cases.

****The pre-petition notes consist of 13 — yes, THIRTEEN — different issuances of notes with interest rates ranging from 4.5% to 9.875% and maturities ranging from 2020 through 2042.

*****Well, as it relates to certain peeps, of course. The debtors’ non-debtor affiliates still had money to make a May 2019 payout to participants in the Executive Bonus Plan.

******The ad hoc noteholder committee is represented by Akin Gump Strauss Hauer & Feld LLP and Evercore Group LLC ($EVR).

• Jurisdiction: S.D. of Texas (Judge )

• Capital Structure:

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Keith Simon, David Hammerman, Annemarie Reilly, Lisa Lansio) & (local) Hunton Andrews Kurth LLP (Timothy Davidson, Ashley Harper)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Lazard Freres & Co LLC

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Ad Hoc Prepetition Noteholder Committee

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Michael Stamer, Meredith Lahaie, Kate Doorley)

    • Financial Advisor: Evercore Group LLC

  • DIP Agent: Citibank NA

    • Legal: Shearman & Sterling LLP (Frederic Sosnick, Ned Schodek, Sara Coelho, Ian Roberts)

Legacy Reserves Inc.

June 18, 2019

Even at 95 years old, you can’t get one pastCharlie Munger. #Legend.

The Permian Basin in West Texas is where it’s at in the world of oil and gas exploration and production.PerWikipedia:

As of 2018, the Permian Basin has produced more than 33 billion barrels of oil, along with 118 trillion cubic feet of natural gas. This production accounts for 20% of US crude oil production and 7% of US dry natural gas production. While the production was thought to have peaked in the early 1970s, new technologies for oil extraction, such as hydraulic fracturing and horizontal drilling have increased production dramatically. Estimates from theEnergy Information Administrationhave predicted that proven reserves in the Permian Basin still hold 5 billion barrels of oil and approximately 19 trillion cubic feet of natural gas.

And it may be even more prolific than originally thought. Norwegian research firmRystad Energyrecently issued a reportindicating that Permian projected output was already above 4.5mm barrels a day in May with volumes exceeding 5mm barrels in June. This staggering level of production is pushing total U.S. oil production to approximately 12.5mm barrels per day in May. That means the Permian now accounts for 36% of US crude oil production — a significant increase over 2018. Normalized across 365 days, that would be a 1.64 billion barrel run rate. This is despite (a)rigs coming offline in the Permianand (b)natural gas flaring and venting reaching all-time highs in Q1 ‘19 due to a lack of pipelines. Come again? That’s right. The Permian is producing in quantities larger than pipelines can accommodate.PerReuters:

Producers burned or vented 661 million cubic feet per day (mmcfd) in the Permian Basin of West Texas and eastern New Mexico, the field that has driven the U.S. to record oil production, according to a new report from Rystad Energy.

The Permian’s first-quarter flaring and venting level more than doubles the production of the U.S. Gulf of Mexico’s most productive gas facility, Royal Dutch Shell’s Mars-Ursa complex, which produces about 260 to 270 mmcfd of gas.

The Permian isn’t alone in this, however. The Bakken shale field in North Dakota is also flaring at a high level. More from Reuters:

Together, the two oil fields on a yearly basis are burning and venting more than the gas demand in countries that include Hungary, Israel, Azerbaijan, Colombia and Romania, according to the report.

All of which brings us toLegacy Reserves Inc. ($LGCY). Despite the midstream challenges, one could be forgiven for thinking that any operators engaged in E&P in the Permian might be insulated from commodity price declines and other macro headwinds. That position, however, would be wrong.

Legacy is a publicly-traded energy company engaged in the acquisition, development, production of oil and nat gas properties; its primary operations are in the Permian Basin (its largest operating region, historically), East Texas, and in the Rocky Mountain and Mid-Continent regions. While some of these basins may produce gobs of oil and gas, acquisition and production is nevertheless a HIGHLY capital intensive endeavor. And, here, like with many other E&P companies that have recently made their way into the bankruptcy bin, “significant capital” translates to “significant debt.”

Per the Company:

Like similar companies in this industry, the Company’s oil and natural gas operations, including their exploration, drilling, and production operations, are capital-intensive activities that require access to significant amounts of capital. An oil price environment that has not recovered from the downturn seen in mid-2014 and the Company’s limited access to new capital have adversely affected the Company’s business. The Company further had liquidity constraints through borrowing base redeterminations under the Prepetition RBL Credit Agreement, as well as an inability to refinance or extend the maturity of the Prepetition RBL Credit Agreement beyond May 31, 2019.

This is the company’s capital structure:

The company made two acquisitions in mid-2015 costing over $540mm. These acquisitions proved to be ill-timed given the longer-than-expected downturn in oil and gas. Per the Company:

In hindsight, despite the GP Board’s and management’s favorable view of the potential future opportunities afforded by these acquisitions and the high-caliber employees hired by the Company in connection therewith, these two acquisitions consumed disproportionately large amounts of the Company’s liquidity during a difficult industry period.

WHOOPS. It’s a good thing there were no public investors in this thing who were in it for the high yield and favorable tax treatment.*

Yet, the company was able to avoid a prior bankruptcy when various other E&P companies were falling like flies. Why was that? Insert the “drillco” structure here: the company entered into a development agreement with private equity firmTPG Special Situations Partnersto drill, baby, drill (as opposed to acquire). What’s a drillco structure? Quite simply, the PE firm provided capital in return for a wellbore interest in the wells that it capitalized. Once TPG clears a specified IRR in relation to any specific well, any remaining proceeds revert to the operator. This structure — along with efforts to delever through out of court exchanges of debt — provided the company with much-needed runway during a rough macro patch.

It didn’t last, however. Liquidity continued to be a pervasive problem and it became abundantly clear that the company required a holistic solution to its balance sheet. That’s what this filing will achieve: this chapter 11 case is a financial restructuring backed by a Restructuring Support Agreement agreed to by nearly the entirety of the capital structure — down through the unsecured notes. Per the Company:

The Global RSA contemplates $256.3 million in backstopped equity commitments, $500.0 million in committed exit financing from the existing RBL Lenders, the equitization of approximately $815.8 million of prepetition debt, and payment in full of the Debtors’ general unsecured creditors.

Said another way, the Permian holds far too much promise for parties in interest to walk away from it without maintaining optionality for the future.

*Investors got burned multiple times along the way here. How did management do? Here is one view (view thread: it’s precious):

😬

• Jurisdiction: S.D. of Texas (Judge Isgur)

• Capital Structure: See above.

• Professionals:

  • Legal: Sidley Austin LLP (Duston McFaul, Charles Persons, Michael Fishel, Maegan Quejada, James Conlan, Bojan Guzina, Andrew O’Neill, Allison Ross Stromberg)

  • Financial Advisor: Alvarez & Marsal LLC (Seth Bullock, Mark Rajcevich)

  • Investment Banker: Perella Weinberg Partners (Kevin Cofsky)

  • Claims Agent: KCC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Official Committee of Unsecured Creditors (Wilmington Trust NA, Dalton Investments LLC, Paul Drueke, John Dinkel, Nicholas Mumford)

  • GSO Capital Partners LP

    • Legal: Latham & Watkins LLP (George Davis, Adam Goldberg, Christopher Harris, Zachary Proulx, Brett Neve, Julian Bulaon) & (local) Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson)

  • DIP Lender: Wells Fargo Bank NA

    • Legal: Orrick LLP (Raniero D’Aversa, Laura Metzger)

  • Prepetition Term Agent: Cortland Capital Market Services LLC

    • Legal: Arnold & Porter Kaye Scholer LLP (Gerardo Mijares-Shafai, Seth Kleinman)

  • Indenture Trustee: Wilmington Trust NA

    • Legal: Pryor Cashman (Seth Lieberman, Patrick Sibley, Andrew Richmond)

  • Ad Hoc Group of Senior Noteholders (Canyon Capital Advisors LLC, DoubleLine Income Solutions Fund, J.H. Lane Partners Master Fund LP, JCG 2016 Holdings LP, The John C. Goff 2010 Family Trust, John C. Goff SEP-IRA, Cuerno Largo Partners LP, MGA insurance Company Inc., Pingora Partners LLC)

    • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Stephen Piraino, Michael Pera) & (local) Rapp & Krock PC (Henry Flores)

Elk Petroleum Inc.

May 22, 2019

On May 22nd 2019, Elk Petroleum Aneth, LLC and Resolute Aneth, LLC voluntarily filed petitions for Chapter 11 bankruptcy with a restructuring support agreement with their noteholders. The debtors already have a plan of reorganization on file. Per the disclosure statement, the debtors claim that the cause of its financial distress and eventual bankruptcy was due to:

Debtors’ ambitious endeavors to acquire multiple oil and gas assets outpaced the Debtors’ balance sheet, and in certain respects, performance of the operated and non-operated assets failed to meet initial expectations.

The debtors tried to alleviate uncertainty of future cash flows through hedging oil prices. Oil prices went up, however, not down, and the hedging was, with the benefit of 50/50 hindsight, clearly a bad mistake. Here is what they have to say about that:

Debtors were unable to capture the financial benefits of the improving commodity price environment due to their hedge obligations under the BP ISDA.

Whoops. The Debtors are to receive $10mm in Debtor-in-Possession financing by certain supporting noteholders. All in all, the cause of distress continues to align with the reason for other bankruptcy filings in O&G land we’ve touched on. High fixed costs, lower than expected revenues and impatient lenders.

• Jurisdiction: District of Delaware (Judge Laurie Silverstein)

• Pre-Petition Capital Structure:

  • Revolving Credit Facility: $14.5mm FO Revolver (AB Elk Holdings LLC)

  • First Lien Credit Facility: $114.0mm TL (HPS Investment Partners)

  • Unsecured Debt: $54.9mm TL (LIM Asia Special Situations Master Fund Limited, AB Elk Holdings, ACR Multi-Strategy Quality Return (MQR) Fund, A Series of Investment Management Series Trust II (“ACR”), Fulcrum Energy Capital Fund II, LLC)

• Professionals:

  • Legal: Proposed Debtors & Debtors-in-Possession - Norton Rose Fulbright LLP (Gregory M. Wilkes, Kristian W. Gluck, Scott P. Drake, John N. Schwartz & Shivani Shah) Womble Bond Dickinson LLP (Matthew P. Ward & Morgan L. Patterson)

  • Financial Advisor: Ankura Consulting Group, LLC (Scott M. Pinsonnault), Opportune LLP

  • Investment Banker: Stephens Inc.

  • Claims Agent: Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

  • HPS Investment Partners: Provider of First Lien Term Loan

  • Certain unsecured loan holders:

    • AB Co-Invest Elk Holdings LLC

  • Certain secured debt holders:

    • AB Elk Holdings LLC

    • Riverstone Credit Partners - Direct, L.P.

    • Riverstone Credit Partners II - Direct LP

    • Riverstone Strategic Credit Partners S, L.P.

    • Riverstone Strategic Credit Partners A-2 AIV, L.P.
      

Bristow Group Inc.

May 11, 2019

Nothing like being late to the party. Following in the footsteps of fellow helicopter transportation companies Erickson Inc., CHC Group, Waypoint Leasing* and PHI Inc., Bristow Group Inc. ($BRS) and its eight affiliated debtors are the latest in the space to find their way into bankruptcy court. The company enters bankruptcy with a restructuring support agreement and a $75mm DIP financing commitment with and from its senior secured noteholders.

While each of the aforementioned companies is in the helicopter transportation space, they don’t all do exactly the same business. PHI, for instance, has a fairly large — and some might say, attractive — medical services business. Bristow, on the other hand, provides industrial aviation and charter services primarily to offshore energy companies in Europe, Africa, the Americas and the Asian Pacific; it also provides search and rescue services for governmental agencies, in addition to the oil and gas industry. Like the other companies, though: it is not immune to (a) the oil and gas downturn and (b) an over-levered balance sheet.

At the time of this writing, the debtors’ chapter 11 filing wasn’t complete and so details are scant. What we do know, however, is that the company does have a restructuring support agreement executed with “the overwhelming majority” of senior secured noteholders and a $75mm DIP commitment.

*Waypoint Leasing is listed as the 14th largest creditor, owed nearly $104k. Sheesh. These businesses can’t catch a break.

• Jurisdiction: S.D. of Texas (Judge Jones)

• Capital Structure:

• Professionals:

  • Legal: Baker Botts LLP (James Prince, Omar Alaniz, Ian Roberts, Kevin Chiu, Emanuel Grillo, Chris Newcomb)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Houlihan Lokey Capital Inc.

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • ABL Facility Agent: Barclays Bank PLC

  • 2019 Term Loan Agent: Ankura Trust Company LLC

  • Indenture Trustee for the 8.75% ‘23 Senior Secured Notes: U.S. Bank NA

  • Indenture Trustee for the 6.25% ‘22 Senior Notes and 4.5% ‘23 Convertible Senior Notes: Wilmington Trust NA

  • Ad Hoc Group of Secured Notes and Term Lenders (Blackrock Financial Management Inc., DW Partners LP, Highbridge Capital Management LLC, Oak Hill Advisors LP, Whitebox Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris) & (local) Haynes and Boone LLP (Charles Beckham, Kelli Norfleet, Martha Wyrick)

  • Ad Hoc Group fo Unsecured Noteholders

    • Legal: Kramer Levin Naftalis & Frankel LLP